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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from to
Commission file number 000-23740
INNOTRAC CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1592285
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6655 Sugarloaf Parkway Duluth, Georgia 30097
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (678) 584-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at August 8, 2003
-----------------------------
Common Stock at $.10 par value 11,564,730 Shares
INNOTRAC CORPORATION
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - June 30, 2003 (Unaudited) and
December 31, 2002 3
Condensed Consolidated Statements of Operations for the Three Months
Ended June 30, 2003 and 2002 (Unaudited) 4
Condensed Consolidated Statements of Operations for the Six Months
Ended June 30, 2003 and 2002 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2003 and 2002 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market Risks 22
Item 4. Controls and Procedures 22
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 25
1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The following condensed consolidated financial statements of Innotrac
Corporation, a Georgia corporation (the "Company"), have been prepared in
accordance with the instructions to Form 10-Q and, therefore, omit or condense
certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting principles
in the United States of America. In the opinion of management, all adjustments
are of a normal and recurring nature, except those specified otherwise, and
include those necessary for a fair presentation of the financial information
for the interim periods reported. Results of operations for the three and six
months ended June 30, 2003 are not necessarily indicative of the results for
the entire year ending December 31, 2003. These financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 2002 Annual Report on Form 10-K.
2
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 615 $ 961
Accounts receivable (net of allowance for doubtful accounts of $1,052 at
June 30, 2003 and $1,169 at December 31, 2002) ............................ 16,678 14,203
Inventory ..................................................................... 17,056 24,098
Deferred income taxes ......................................................... 640 552
Prepaid expenses and other .................................................... 1,621 2,357
-------- --------
Total current assets ................................................ 36,610 42,171
-------- --------
Property and equipment:
Rental equipment .............................................................. 1,125 1,372
Computer software and equipment ............................................... 26,900 26,315
Furniture, fixtures and leasehold improvements ................................ 4,655 4,585
-------- --------
32,680 32,272
Less accumulated depreciation and amortization ................................ (15,894) (13,357)
-------- --------
16,786 18,915
-------- --------
Goodwill ........................................................................... 25,164 24,988
Deferred income taxes .............................................................. 8,598 7,940
Other assets, net .................................................................. 1,253 1,485
-------- --------
Total assets ........................................................ $ 88,411 $ 95,499
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 4,805 $ 13,517
Accrued expenses and other .................................................... 4,208 6,626
Line of credit ................................................................ 19,007 --
-------- --------
Total current liabilities ........................................... 28,020 20,143
-------- --------
Noncurrent liabilities:
Line of credit ................................................................ -- 14,372
Other noncurrent liabilities .................................................. 1,049 1,125
-------- --------
Total noncurrent liabilities ........................................ 1,049 15,497
-------- --------
Commitments and contingencies (see Note 7)
Shareholders' equity:
Preferred stock: 10,000,000 shares authorized, $0.10 par value,
no shares issued or outstanding ....................................... -- --
Common stock: 50,000,000 shares authorized, $0.10 par value,
11,674,595 shares issued, 11,533,830 (2003) and 11,417,780 (2002)
shares outstanding .................................................... 1,167 1,167
Additional paid-in capital .................................................... 63,063 62,614
Accumulated deficit ........................................................... (4,504) (3,219)
Treasury stock: 140,765 (2003) and 256,815 (2002) shares held ................ (384) (703)
-------- --------
Total shareholders' equity .......................................... 59,342 59,859
-------- --------
Total liabilities and shareholders' equity .......................... $ 88,411 $ 95,499
======== ========
See notes to condensed consolidated financial statements.
3
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
---------------------------
2003 2002
-------- --------
Revenues, net ........................................ $ 17,631 $ 19,351
Cost of revenues ..................................... 8,488 10,308
-------- --------
Gross margin ........................ 9,143 9,043
-------- --------
Operating expenses:
Selling, general and administrative expenses .... 8,183 7,543
Special credits ................................. (30) (359)
Depreciation and amortization ................... 1,462 1,271
-------- --------
Total operating expenses .................. 9,615 8,455
-------- --------
Operating (loss) income ............. (472) 588
-------- --------
Other (income) expense:
Interest expense ............................... 155 50
Other income ................................... -- (2)
-------- --------
Total other expense ...................... 155 48
-------- --------
(Loss) income before income taxes .................... (627) 540
Income tax benefit (provision) ....................... 234 (227)
-------- --------
Net (loss) income ................... $ (393) $ 313
======== ========
(Loss) earnings per share:
Basic ......................................... $ (0.03) $ 0.03
======== ========
Diluted ....................................... $ (0.03) $ 0.03
======== ========
Weighted average shares outstanding:
Basic ......................................... 11,487 11,623
======== ========
Diluted ....................................... 11,487 12,017
======== ========
See notes to condensed consolidated financial statements.
4
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
---------------------------
2003 2002
-------- --------
Revenues, net ........................................ $ 35,965 $ 40,399
Cost of revenues ..................................... 17,158 22,015
Special credits ...................................... -- (293)
-------- --------
Gross margin ........................ 18,807 18,677
-------- --------
Operating expenses:
Selling, general and administrative expenses .... 17,543 15,338
Special credits ................................. (30) (1,321)
Depreciation and amortization ................... 2,931 2,489
-------- --------
Total operating expenses .................. 20,444 16,506
-------- --------
Operating (loss) income ............. (1,637) 2,171
-------- --------
Other (income) expense:
Interest expense ............................... 402 132
Other income ................................... (7) (89)
-------- --------
Total other expense ...................... 395 43
-------- --------
(Loss) income before income taxes .................... (2,032) 2,128
Income tax benefit (provision) ....................... 747 (849)
-------- --------
Net (loss) income ................... $ (1,285) $ 1,279
======== ========
(Loss) earnings per share:
Basic ......................................... $ (0.11) $ 0.11
======== ========
Diluted ....................................... $ (0.11) $ 0.11
======== ========
Weighted average shares outstanding:
Basic ......................................... 11,455 11,570
======== ========
Diluted ....................................... 11,455 11,902
======== ========
See notes to condensed consolidated financial statements.
5
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
---------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net (loss) income .............................................................. $ (1,285) $ 1,279
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization .............................................. 2,931 2,489
Impairment and loss on fixed assets ........................................ -- 501
Deferred income taxes ...................................................... (746) (2,177)
Amortization of deferred compensation ...................................... 36 36
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ................................. (2,475) 2,144
Decrease in inventory ...................................................... 7,042 9,120
Decrease in prepaid expenses and other assets .............................. 853 2,180
(Decrease) increase in accounts payable .................................... (8,712) 2,749
(Decrease) in accrued expenses and other ................................... (2,163) (3,879)
-------- --------
Net cash (used in) provided by operating activities ................... (4,519) 14,442
-------- --------
Cash flows from investing activities:
Capital expenditures ........................................................... (655) (8,039)
Earn-out payment ............................................................... -- (13,727)
Payment for business acquired .................................................. (176) --
Sale of marketable securities .................................................. -- 435
-------- --------
Net cash used in investing activities ................................. (831) (21,331)
-------- --------
Cash flows from financing activities:
Borrowings under line of credit ................................................ 4,635 --
Repayment of capital lease and other obligations ............................... (72) (145)
Loan fees paid ................................................................. (31) (50)
Exercise of employee stock options ............................................. 472 --
-------- --------
Net cash provided by (used in) financing activities .................. 5,004 (195)
-------- --------
Net decrease in cash and cash equivalents ........................................... (346) (7,084)
Cash and cash equivalents, beginning of period ...................................... 961 9,413
-------- --------
Cash and cash equivalents, end of period ............................................ $ 615 $ 2,329
======== ========
Supplemental cash flow disclosures:
Cash paid for interest ......................................................... $ 425 $ 154
======== ========
Cash refunds received for income taxes ......................................... $ (1,486) $ (18)
======== ========
Noncash transactions:
Stock issued for business acquired ............................................. $ -- $ 1,550
======== ========
See notes to condensed consolidated financial statements.
6
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for quarterly financial reporting are
the same as those disclosed in the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the year ended
December 31, 2002, except as discussed below. Certain of the Company's
more significant accounting policies are as follows:
Accounting Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Goodwill and Other Acquired Intangibles. Goodwill represents the cost
of an acquired enterprise in excess of the fair market value of the
net tangible and identifiable intangible assets acquired. The Company
accounts for goodwill and other acquired intangibles in accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets". The Company
tests goodwill annually for impairment as of January 1 or sooner if
circumstances indicate.
Under SFAS No. 142, goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value. Upon
completion of its analysis for impairment in the second quarter of
2002 and again in the first quarter of 2003 in accordance with SFAS
No. 142, no impairment was determined to exist at those times.
Innotrac's goodwill carrying amount as of June 30, 2003 is $25.2
million.
Stock-Based Compensation Plans. The Company accounts for its
stock-based compensation plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Since the exercise price for all options granted under those plans was
equal to the market value of the underlying common stock on the date
of grant, no compensation cost is recognized in the accompanying
condensed unaudited consolidated statements of operations. Had
compensation cost for stock options been determined under a fair value
based method, in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", as
amended by Statement of Financial Accounting Standards No. 148, the
Company's net (loss) income and net (loss) income per share would have
been the following pro forma amounts (in 000's, except per share
data):
7
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ------------------------
2003 2002 2003 2002
------ ----- ------- ------
Net (loss) income $ (393) $ 313 $(1,285) $1,279
Pro forma net (loss) income $ (601) $ 52 $(1,705) $ 738
Diluted net (loss) income per share $(0.03) $0.03 $ (0.11) $ 0.11
Pro forma net (loss) income per share $(0.05) $0.00 $ (0.15) $ 0.06
Under the fair value based method, compensation cost, net of tax is
$208,000 and $261,000 for the three months ended June 30, 2003 and
2002, respectively and $420,000 and $541,000 for the six months ended
June 30, 2003 and 2002, respectively.
During the three and six months ended June 30, 2003, options
representing 101,050 and 116,050 shares were exercised, respectively.
The option shares were issued out of treasury stock.
Deferred Tax Asset. Innotrac utilizes the liability method of
accounting for income taxes. Under the liability method, deferred
taxes are determined based on the difference between the financial and
tax bases of assets and liabilities using enacted tax rates in effect
in the years in which the differences are expected to reverse. A
valuation allowance is recorded against deferred tax assets if the
Company considers it is more likely than not that deferred tax assets
will not be realized (see Note 6).
Revenue Recognition. Innotrac derives its revenue primarily from two
sources: (1) fulfillment operations and (2) the delivery of business
services. Innotrac's fulfillment services operations record revenue at
the conclusion of the material selection, packaging and shipping
process. Innotrac's call center services business recognizes revenue
according to written pricing agreements based on number of calls,
minutes or hourly rate basis. All other revenues are recognized as
services are rendered. As required by the consensus reached in
Emerging Issue Task Force ("EITF") Issue No. 99-19, revenues have been
recorded net of the cost of the equipment for all fee-for-service
clients.
2. SPECIAL CHARGES AND SPECIAL CREDITS
At June 30, 2003 and December 31, 2002, the Company had approximately
$152,000 and $277,000, respectively, in accruals related to the
special charges recorded during the year ended December 31, 2000. The
remaining accruals at June 30, 2003 relate to exiting the front-end
e-commerce and web hosting business. Cash payments relating to these
accruals for the three and six months ended June 30, 2003 were
8
approximately $56,000 and $125,000, respectively. The Company
recognized a credit of approximately $359,000 and $1.6 million during
the three and six months ended June 30, 2002, related to gains
realized on sales of inventory items and cash collected for accounts
receivable, both of which were written off as special charges in
previous periods. These amounts were recorded as a reduction of the
special credit line item in the accompanying condensed unaudited
consolidated statements of operations. We expect that the remaining
accrual, which is associated with one specific client, will be fully
utilized by the end of 2003.
During the three and six months ended June 30, 2003, the Company
recognized a credit of approximately $30,000 related to the favorable
settlement of a severance accrual recorded as part of the third
quarter 2002 special charge. This amount was recorded as a reduction
of the special credit line item in the accompanying condensed
unaudited consolidated statements of operations.
3. FINANCING OBLIGATIONS
The Company has a revolving credit agreement (the "Agreement") with a
bank for borrowings up to $40 million that matures in June 2005. The
Company and its subsidiary have granted a security interest in their
assets and the subsidiary has provided a guarantee to the lender as
collateral under this revolving credit agreement. At June 30, 2003 and
December 31, 2002, the Company had approximately $19.0 million and
$14.4 million, respectively, outstanding in borrowings under the line
of credit. The revolving line of credit agreement contains various
restrictive financial and change of ownership control covenants.
Noncompliance with any of the covenants allows the lender to declare
any outstanding borrowing amounts to be immediately due and payable.
The Company entered into an amended and restated Agreement with its
lenders on April 3, 2003. As amended, the Agreement requires the
Company to maintain a lockbox arrangement with the lenders and contains
provisions limiting borrowings under the Agreement to a specified
percentage of eligible accounts receivable and inventory, which totaled
$25.4 million at June 30, 2003 and $31.5 million at December 31, 2002.
At June 30, 2003 and December 31, 2002, the Company had $6.4 million
and $17.1 million, respectively, available under the Agreement. The
financial covenants require the Company to maintain tangible net worth,
as defined in the Agreement, which includes deferred taxes, of at least
$33.0 million at June 30, 2003, a debt to tangible net worth ratio of
not more than 1.5 to 1 at June 30, 2003 and a fixed charge coverage
ratio of 1.75 to 1 by December 31, 2003. The quarterly tangible net
worth requirement escalates to $34.0 million at December 31, 2003 and
escalates by $250,000 for each fiscal quarter thereafter. At June 30,
2003, the Company was in compliance with all covenants under the
Agreement.
Due to the provisions of the Agreement, which 1) requires that the
Company maintain a lockbox arrangement with the lender, and 2) allows
the lender to declare any outstanding borrowing amounts to be
immediately due and payable as a result of noncompliance with any of
the covenants, the outstanding borrowings under the Agreement have
been classified as a current liability at June 30, 2003.
9
Interest on borrowings is payable monthly at rates equal to the prime
rate, or at the Company's option, LIBOR plus up to 225 basis points.
On May 13, 2003, the Company fixed $10.0 million of its $19.0 million
of borrowings at a 90-day LIBOR rate of 2.80%. During the three months
ended June 30, 2003 and 2002, the Company incurred interest expense
related to the line of credit of approximately $172,000 and $15,000,
respectively, resulting in a weighted average interest rate of 3.46%
and 3.18%, respectively. During the six months ended June 30, 2003 and
2002, the Company incurred interest expense related to the line of
credit of approximately $401,000 and $49,000, respectively, resulting
in a weighted average interest rate of 3.72% and 3.09%, respectively.
The Company also incurred unused revolving credit facility fees of
approximately $13,000 and $24,000 during the three months ended June
30, 2003 and 2002, respectively, and $24,000 and $67,000 during the
six months ended June 30, 2003 and 2002, respectively.
Interest expense disclosed in the accompanying condensed unaudited
consolidated statements of operations includes capital lease interest
of approximately $6,000 and $13,000 for the three and six months ended
June 30, 2003, respectively, and is net of interest income of
approximately $36,000 for both the three and six months ended June 30,
2003.
As of June 30, 2003, the Company had outstanding letters of credit
totaling approximately $420,000 issued in connection with routine
business requirements.
4. EARNINGS PER SHARE
The following table shows the shares (in 000's) used in computing
diluted earnings per share ("EPS") in accordance with Statement of
Financial Accounting Standards No. 128:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
------ ------ ------ ------
Diluted earnings per share:
Weighted average shares outstanding 11,487 11,623 11,455 11,570
Employee and director stock options -- 394 -- 332
------ ------ ------ ------
Weighted average shares assuming dilution 11,487 12,017 11,455 11,902
====== ====== ====== ======
Options and warrants outstanding to purchase 2.2 million shares of the
Company's common stock for both the three and six months ended June 30,
2003 and 1.1 million for both the three and six months ended June 30,
2002 were not included in the computation of diluted EPS because their
effect was anti-dilutive.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement requires
recording costs associated with exit or disposal activities at their
fair values when a liability has been incurred. Under previous
guidance, certain exit costs were accrued upon management's commitment
10
to an exit plan, which is generally before an actual liability has been
incurred. The Company adopted SFAS No. 146 on January 1, 2003; the
adoption did not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
6. INCOME TAXES
Innotrac's net deferred tax asset as of June 30, 2003 is approximately
$9.2 million. This net deferred tax asset was generated by net
operating loss carryforwards created primarily by the special charge
of $34.3 million recorded in 2000 and the net losses generated in 2002
and the first half of 2003. Innotrac has a tax net operating loss
carryforward of $27.6 million at December 31, 2002 that expires
between 2018 and 2020. Although the Company has generated financial
reporting and tax losses in 2000, 2002 and the first half of 2003, the
Company was profitable in 2001 and prior to 2000. Management believes
that its net operating loss carryforwards will be utilized through
future earnings before their expiration. This assessment is based on
management's expectations of increased revenues, lower selling,
general and administrative expenses, reduced capital expenditures and
no impairment losses related to goodwill in the future.
Innotrac's ability to generate the expected amounts of taxable income
from future operations is dependent upon general economic conditions,
competitive pressures on sales and margins and other factors beyond
management's control. There can be no assurance that Innotrac will
meet its expectations for future taxable income in the carryforward
period. However, management considered the above factors in reaching
the conclusion that it is more likely than not that future taxable
income will be sufficient to fully realize the net deferred tax asset
recorded at June 30, 2003. The amount of the net deferred tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are
reduced.
7. COMMITMENTS AND CONTINGENCIES
Shareholder Rights Plan. In December of 1997, the Company's Board of
Directors approved a Shareholder Rights Plan (the "Rights Plan"). The
Rights Plan provides for the distribution of one Right for each
outstanding share of the Company's Common Stock held of record as of
the close of business on January 1, 1998 or that thereafter becomes
outstanding prior to the earlier of the final expiration date of the
Rights or the first date upon which the Rights become exercisable. Each
Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A Participating Cumulative Preferred
Stock, par value $.10 per share, at a price of $60.00 (the "Purchase
Price"), subject to adjustment. The Rights are not exercisable until
ten calendar days after a person or group (an "Acquiring Person") buys,
or announces a tender offer for 15% or more of the Company's Common
Stock. Such ownership level has been increased to 25% for a particular
shareholder that owned approximately 20.57% of the shares outstanding
on August 13, 2003. In the event the Rights become exercisable, each
Right will entitle the holder to receive that number of shares of
Common Stock having a market value equal to the Purchase Price. If,
after any person has become an Acquiring Person (other than through a
tender offer approved by qualifying members of the Board of Directors),
the Company is involved in a merger or other business combination where
the Company is not the surviving corporation, or the Company sells 50%
or more of its assets, operating income, or cash flow, then each Right
will entitle the holder to purchase, for the Purchase Price, that
number of shares of common or other capital stock of the acquiring
entity which at the time of such transaction have a market value of
twice the Purchase Price. The Rights will expire on January 1, 2008,
11
unless extended, unless the Rights are earlier exchanged, or unless
the Rights are earlier redeemed by the Company in whole, but not in
part, at a price of $0.001 per Right.
Legal Proceedings. The Company is subject to various legal proceedings
and claims that arise in the ordinary course of business. There are no
material pending legal proceedings to which the Company is a party.
12
ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion may contain certain forward-looking
statements that are subject to conditions that are beyond the control
of the Company. Actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ include, but are not limited to,
the Company's reliance on a small number of major clients; risks
associated with the terms and pricing of our contracts; reliance on
the telecommunications industry; risks associated with changing
technology and supporting existing technology; risks associated with
competition and other factors discussed in more detail under the
heading "Certain Factors Affecting Forward-Looking Statements" in Part
I, Item 1 of our Annual Report on Form 10-K for the year ended
December 31, 2002.
OVERVIEW
Innotrac Corporation ("Innotrac" or the "Company"), founded in 1984
and headquartered in Atlanta, Georgia, provides order processing,
order fulfillment and call center services to large corporations that
outsource these functions. In order to perform call center and
fulfillment functions in-house, a company may be required to develop
expensive, labor-intensive infrastructures, which may divert its
resources and management's focus from its principal or core business.
By assuming responsibility for these tasks, Innotrac strives to
improve the quality of the non-core operations of their clients and to
reduce their overall operating costs. Innotrac enables their clients
to manage their sales channels efficiently by utilizing their core
competencies, which include:
- Fulfillment Services:
- sophisticated warehouse management technology
- automated shipping solutions
- real-time inventory tracking and order status
- purchasing and inventory management
- channel development
- zone skipping for shipment cost reduction
- product sourcing and procurement
- packaging solutions
- back-order management
- returns management
- Customer Support Services:
- inbound call center services
- technical support and order status
- returns and refunds processing
- call centers integrated into fulfillment platform
- cross-sell/up-sell services
- collaborative chat
- intuitive e-mail response
13
The Company fulfills products that include Digital Subscriber Line and
Cable Modems ("Modems") and consumer phones and wireless pager
equipment ("Telecommunications products") for clients such as
BellSouth Corporation ("BellSouth"), Qwest Communications
International, Inc. ("Qwest") and Comcast Corporation ("Comcast") and
their customers. During the quarters ended June 30, 2003 and 2002,
approximately 24.9% and 26.5% of revenues, respectively, were
generated from Telecommunications product clients and 19.5% and 23.2%
of revenues, respectively, were from Modems clients. During the six
months ended June 30, 2003 and 2002, approximately 23.3% and 27.0% of
revenues, respectively, were generated from Telecommunications product
clients and 19.9% and 21.8% of revenues, respectively, were from
Modems clients.
The Company also provides a variety of these services for a
significant number of retail, catalog and direct marketing companies
such as Nordstrom, Inc., Ann Taylor Stores Corporation, Smith &
Hawken, Ltd., The Coca-Cola Company, Tactica International, Inc.,
Porsche Cars North America, Inc., Wilsons Leather and Martha Stewart
Living Omnimedia, Inc. During the quarters ended June 30, 2003 and
2002, 27.6% and 14.7% of revenues, respectively, were from retail and
catalog clients and 16.2% and 26.7% of revenues, respectively, were
from direct marketing clients. During the six months ended June 30,
2003 and 2002, 26.9% and 14.2% of revenues, respectively, were from
retail and catalog clients and 16.8% and 30.7% of revenues,
respectively, were from direct marketing clients.
The Company also provides these services for business-to-business
("B2B") clients including Books are Fun (a division of Readers'
Digest) and The Walt Disney Company. During the quarters ended June
30, 2003 and 2002, 11.7% and 4.3% of revenues, respectively, were from
B2B clients. During the six months ended June 30, 2003 and 2002, 13.1%
and 4.1% of revenues, respectively, were from B2B clients.
14
RESULTS OF OPERATIONS
The following table sets forth unaudited summary operating data, expressed as a
percentage of revenues, for the three and six months ended June 30, 2003 and
2002. The data has been prepared on the same basis as the annual consolidated
financial statements. In the opinion of management, it reflects normal and
recurring adjustments necessary for a fair presentation of the information for
the periods presented. Operating results for any period are not necessarily
indicative of results for any future period.
The financial information provided below has been rounded in order to simplify
its presentation. However, the percentages below are calculated using the
detailed information contained in the condensed unaudited consolidated financial
statements.
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2003 2002 2003 2002
----- ----- ----- -----
Revenues ....................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ............................... 48.1 53.3 47.7 54.5
Special credits ................................ -- -- -- (0.7)
----- ----- ----- -----
Gross margin ................................ 51.9 46.7 52.3 46.2
Selling, general and administrative expenses ... 46.4 39.0 48.8 37.9
Special credits ................................ (0.1) (1.9) (0.1) (3.3)
Depreciation and amortization .................. 8.3 6.6 8.1 6.2
----- ----- ----- -----
Operating (loss) income ..................... (2.7) 3.0 (4.5) 5.4
Other expense, net ............................. 0.8 0.2 1.1 0.1
----- ----- ----- -----
(Loss) income before income taxes ........... (3.5) 2.8 (5.6) 5.3
Income tax benefit (provision) ................. 1.3 (1.2) 2.0 (2.1)
----- ----- ----- -----
Net (loss) income ........................... (2.2)% 1.6% (3.6)% 3.2%
===== ===== ===== =====
SPECIAL CHARGES AND SPECIAL CREDITS
At June 30, 2003 and December 31, 2002, the Company had approximately $152,000
and $277,000, respectively, in accruals related to the special charges recorded
during the year ended December 31, 2000. The remaining accruals at June 30,
2003 relate to exiting the front-end e-commerce and web hosting business. Cash
payments relating to these accruals for the three and six months ended June 30,
2003 were approximately $56,000 and $125,000, respectively. The Company
recognized a credit of approximately $359,000 and $1.6 million during the three
and six months ended June 30, 2002, related to gains realized on sales of
inventory items and cash collected for accounts receivable, both of which were
written off as special charges in previous periods. These amounts were recorded
as a reduction of the special credit line item in the accompanying condensed
unaudited consolidated statements of operations. We expect that the remaining
accrual, which is associated with one specific client, will be fully utilized
by the end of 2003.
During the three and six months ended June 30, 2003, the Company recognized a
credit of approximately $30,000 related to the favorable settlement of a
severance accrual recorded as part of the third quarter 2002 special charge.
This amount was recorded as a reduction of the special credit line item in the
accompanying condensed unaudited consolidated statements of operations.
15
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Revenues. Net revenues decreased 8.9% to $17.6 million for the three months
ended June 30, 2003 from $19.4 million for the three months ended June 30,
2002. The decrease in revenues is primarily due to a decrease in volumes from
our direct marketing clients along with a substantial decline in associated
pass-through freight revenues. This decline in revenues was offset by the
commencement of the Smith & Hawken, Ann Taylor and Books Are Fun contracts in
the third quarter of 2002.
Cost of Revenues. Cost of revenues decreased 17.7% to $8.5 million for the
three months ended June 30, 2003 compared to $10.3 million for the three months
ended June 30, 2002. Cost of revenues decreased primarily due to the reduction
in pass-through freight costs associated with the decline in volumes from our
direct marketing clients. This decline in cost of revenues was offset by
additional fulfillment labor costs incurred to support the new clients
mentioned above, which commenced operations during the third quarter of 2002.
Gross Margin. For the three months ended June 30, 2003, the Company's gross
margin increased by $100,000 to $9.1 million, or 51.9% of revenues, compared to
$9.0 million, or 46.7% of revenues, for the three months ended June 30, 2002.
This increase was due primarily to the decrease in reimbursable freight costs,
which have a low margin, during the three months ended June 30, 2003 and the
reduction of low margin revenue related to one customer, Warranty Corporation
of America ("WACA").
Selling, General and Administrative Expenses. S,G&A expenses for the three
months ended June 30, 2003 increased to $8.2 million, or 46.4% of revenues,
compared to $7.5 million, or 39.0% of revenues, for the same period in 2002.
The increase in expenses primarily relates to expenses associated with the
addition of two new fulfillment facilities located near Chicago and Cincinnati
which were opened during the second half of 2002.
Special Credits. During the three months ended June 30, 2003, the Company
recognized approximately $30,000 related to the favorable settlement of a
severance accrual recorded as part of the third quarter 2002 special charge.
During the three months ended June 30, 2002, the Company collected cash of
$359,000 on accounts receivable which were previously fully reserved for as
part of the 2000 special charge. The special charge reserve was reversed as a
credit to income within the special credit line item on the accompanying
condensed unaudited consolidated statements of operations in an amount equal to
the cash received.
Income Taxes. The Company's effective tax rate for the three months ended June
30, 2003 and 2002 was 37.3% and 42.0%, respectively. The decrease in the
absolute rate was principally due to the greater impact of certain items not
deductible for tax purposes in 2002.
16
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Revenues. Net revenues decreased 11.0% to $36.0 million for the six months
ended June 30, 2003 from $40.4 million for the six months ended June 30, 2002.
The decrease in revenues is primarily due to a decrease in volumes from our
direct marketing clients along with a substantial decline in associated
pass-through freight revenues. This decline in revenues was offset by the
commencement of the Smith & Hawken, Ann Taylor and Books Are Fun contracts in
the third quarter of 2002.
Cost of Revenues. Cost of revenues decreased 22.1% to $17.2 million for the six
months ended June 30, 2003 compared to $22.0 million for the six months ended
June 30, 2002. Cost of revenues decreased primarily due to the reduction in
pass-through freight costs associated with the decline in volumes from our
direct marketing clients. This decline in cost of revenues was offset by
additional fulfillment labor costs incurred to support the new clients
mentioned above, which commenced operations during the third quarter of 2002.
Special Credits. The Company recognized approximately $293,000 related to gains
realized on sales of inventory items previously written off as part of the 2000
special charge during the six months ended June 30, 2002.
Gross Margin. For the six months ended June 30, 2003, the Company's gross
margin increased by $130,000 to $18.8 million, or 52.3% of revenues, compared
to $18.7 million, or 46.2% of revenues, for the six months ended June 30, 2002.
This increase was due primarily to the decrease in reimbursable freight costs,
which have a low margin, during the six months ended June 30, 2003 and the
reduction of low margin revenue related to one customer, Warranty Corporation
of America ("WACA").
Selling, General and Administrative Expenses. S,G&A expenses for the six months
ended June 30, 2003 increased to $17.5 million, or 48.8% of revenues, compared
to $15.3 million, or 37.9% of revenues, for the same period in 2002. The
increase in expenses primarily relates to expenses associated with the addition
of two new fulfillment facilities located near Chicago and Cincinnati which
were opened during the second half of 2002.
Special Credits. During the six months ended June 30, 2003, the Company
recognized approximately $30,000 related to the favorable settlement of a
severance accrual recorded as part of the third quarter 2002 special charge.
During the six months ended June 30, 2002, the Company collected cash of $1.3
million on accounts receivable which were previously fully reserved for as part
of the 2000 special charge. The special charge reserve was reversed as a credit
to income within the special credit line item on the accompanying condensed
unaudited consolidated statements of operations in an amount equal to the cash
received.
Income Taxes. The Company's effective tax rate for the six months ended June
30, 2003 and 2002 was 36.8% and 39.9%, respectively. The decrease in the
absolute rate was principally due to the greater impact of certain items not
deductible for tax purposes in 2002.
17
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations and capital expenditures primarily through
cash flow from operations and borrowings under a credit facility with a bank.
The Company had cash and cash equivalents of approximately $615,000 at June 30,
2003 as compared to $961,000 at December 31, 2002. Additionally, the Company
had borrowings under its revolving credit facility (discussed below) of $19.0
million outstanding at June 30, 2003 as compared to $14.4 million at December
31, 2002. The primary use of cash was to reduce accounts payable during the
first half of 2003.
The Company has a revolving credit agreement (the "Agreement") with a bank for
borrowings up to $40 million that matures in June 2005. The Company and its
subsidiary have granted a security interest in all of their assets and the
subsidiary has provided a guarantee to the lender as collateral under this
revolving credit agreement. At June 30, 2003 and December 31, 2002, the Company
had approximately $19.0 million and $14.4 million, respectively, outstanding in
borrowings under the line of credit. The revolving line of credit agreement
contains various restrictive financial and change of ownership control
covenants. Noncompliance with any of the covenants allows the lender to declare
any outstanding borrowing amounts to be immediately due and payable.
The Company amended and restated the Agreement with its lender on April 3,
2003. As amended, the Agreement requires the Company to maintain a lockbox
arrangement with the lenders and contains provisions limiting borrowings under
the Agreement to a specified percentage of eligible accounts receivable and
inventory, which totaled $25.4 million at June 30, 2003 and $31.5 million at
December 31, 2002. At June 30, 2003 and December 31, 2002, the Company had $6.4
million and $17.1 million, respectively, available under the Agreement. The
financial covenants require the Company to maintain tangible net worth, as
defined in the Agreement, which includes deferred taxes, of at least $33.0
million at June 30, 2003, a debt to tangible net worth ratio of not more than
1.5 to 1 at June 30, 2003 and a fixed charge coverage ratio of 1.75 to 1 by
December 31, 2003. The quarterly tangible net worth requirement escalates to
$34.0 million at December 31, 2003 and escalates by $250,000 for each fiscal
quarter thereafter. At June 30, 2003, the Company was in compliance with all
covenants under the Agreement.
Due to the provisions of the Agreement, which 1) requires that the Company
maintain a lockbox arrangement with the lender, and 2) allows the lender to
declare any outstanding borrowing amounts to be immediately due and payable as
a result of noncompliance with any of the covenants, the outstanding borrowings
under the Agreement have been classified as a current liability at June 30,
2003.
Interest on borrowings is payable monthly at rates equal to the prime rate or,
at the Company's option, LIBOR plus up to 225 basis points. On May 13, 2003,
the Company fixed $10.0 million of its $19.0 million of borrowings at a 90-day
LIBOR rate of 2.80%. During the three months ended June 30, 2003 and 2002, the
Company incurred interest expense related to the line of credit of
approximately $172,000 and $15,000, respectively, resulting in a weighted
average interest rate of 3.46% and 3.18%, respectively. During the six months
ended June 30, 2003 and 2002, the Company incurred interest expense related to
the line of credit of approximately $401,000 and $49,000, respectively,
resulting in a weighted average interest rate of 3.72% and 3.09%, respectively.
Interest expense disclosed in the accompanying condensed unaudited consolidated
statements of operations includes capital lease interest of approximately
$6,000 and $13,000 for the three and six months ended June 30, 2003,
respectively, and is net of interest income of approximately $36,000 for both
the three and six months ended June 30, 2003.
18
During the six months ended June 30, 2003, the Company used approximately $4.5
million in cash flows from operating activities compared to generating $14.4
million in cash flows from operating activities in the same period in 2002. The
decrease in cash flows from operating activities was the result of a decrease
of $2.6 million in net income, along with an increase in accounts receivable
offset by a decrease in accounts payable, accrued expenses and inventory.
During the six months ended June 30, 2003, net cash used in investing
activities was $831,000 as compared to $21.3 million in 2002. This difference
was due to a $13.7 million earn-out payment made in February 2002 resulting
from a prior acquisition and $8.0 million in capital expenditures in 2002,
primarily for capitalized technology costs, compared with $655,000 in 2003.
During the six months ended June 30, 2003, net cash provided by financing
activities was $5.0 million compared to net cash used in financing activities
of $195,000 in the same period in 2002. The $5.2 million increase was primarily
due to additional borrowings under the credit facility which were mainly used
to reduce accounts payable.
The Company's primary long-term contractual commitments consist of capital and
operating leases. See the discussion of "Liquidity and Capital Resources" in
our Annual Report on Form 10-K for the year ended December 31, 2002 and Note 7
to the consolidated financial statements therein. The Company has no long-term
purchase commitments.
The Company estimates that its cash and financing needs through 2003 will be
met by cash flows from operations and its credit facility. The Company may need
to raise additional funds in order to take advantage of unanticipated
opportunities. There can be no assurance that the Company will be able to raise
any such capital on terms acceptable to the Company or at all.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those policies that can have a significant
impact on the presentation of our financial position and results of operations
and demand the most significant use of subjective estimates and management
judgment. Because of the uncertainty inherent in such estimates, actual results
may differ from these estimates. Specific risks inherent in our application of
these critical policies are described below. For all of these policies, we
caution that future events rarely develop exactly as forecasted, and the best
estimates routinely require adjustment. These policies often require difficult
judgments on complex matters that are often subject to multiple sources of
authoritative guidance. Additional information concerning our accounting
policies can be found in Note 1 of this Form 10-Q and in Note 2 included in the
Company's Annual Report on 10-K for the year ended December 31, 2002. Those
that we believe that are most critical to an investor's understanding of our
financial results and condition and require complex management judgment are
discussed below:
Goodwill and Other Acquired Intangibles - Goodwill represents the cost of an
acquired enterprise in excess of the fair market value of the net tangible and
identifiable intangible assets acquired. Goodwill and other acquired
intangibles related to business combinations prior to July 1, 2001 were being
amortized over 5-20 years on a straight-line basis, which represented
management's estimation of the related benefit to be derived from the acquired
business. However, goodwill and other acquired intangibles from business
combinations occurring after June 30, 2001, including the Company's acquisition
of iFulfillment, Inc. in July 2001, are accounted for under the transition
provisions for business combinations of SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets". The Company adopted
SFAS No. 142 effective January 1, 2002, which changed the accounting for
19
goodwill and other indefinite life intangibles from an amortization method to an
impairment only approach. Under SFAS No. 142, goodwill impairment is deemed to
exist if the net book value of a reporting unit exceeds its estimated fair
value. Upon completion of its analysis for impairment in the first quarter of
2003 in accordance with SFAS No. 142, no impairment was determined to exist at
that time.
Innotrac's goodwill carrying amount as of June 30, 2003 was $25.2 million. This
asset relates to the goodwill associated with the Company's acquisition of
Universal Distribution Services ("UDS") in December 2000 (including the earnout
payment made to the former UDS shareholders in February 2002), and the
acquisition of iFulfillment, Inc. in July 2001. In accordance with SFAS No.
142, the Company contracted with an independent third party valuation firm to
perform a valuation in the first quarter of 2003. The third party valuation
supported the determination that the fair value of the reporting unit at
January 1, 2003 exceeded the carrying amount of the net assets, including
goodwill, and thus no impairment existed. Management has reviewed and concurs
with the major assumptions used in the third party's valuation at January 1,
2003. The Company will perform this impairment test annually as of January 1 or
sooner if circumstances indicate. There can be no assurance however that future
valuations will continue to support this determination, or that goodwill will
not be found to be impaired in the future.
Deferred Tax Asset - Innotrac utilizes the liability method of accounting for
income taxes. Under the liability method, deferred taxes are determined based
on the difference between the financial and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. A valuation allowance is recorded against deferred tax
assets if the Company considers it is more likely than not that deferred tax
assets will not be realized. Innotrac's net deferred tax asset as of June 30,
2003 was approximately $9.2 million. This net deferred tax asset was generated
by net operating loss carryforwards created primarily by the special charge of
$34.3 million recorded in 2000 and the net losses generated in 2002 and the
first half of 2003. Innotrac has a tax net operating loss carryforward of $27.6
million at December 31, 2002 that expires between 2018 and 2020. Although the
Company has generated financial reporting and tax losses in 2000, 2002 and the
first half of 2003, the Company was profitable in 2001 and prior to 2000.
Management believes that its net operating loss carryforwards will be utilized
principally through future earnings before their expiration. This assessment is
based on management's expectations of increased revenues, lower selling,
general and administrative expenses, reduced capital expenditures and no
impairment losses related to goodwill in the future.
Innotrac's ability to generate the expected amounts of taxable income from
future operations is dependent upon general economic conditions, competitive
pressures on sales and margins and other factors beyond management's control.
There can be no assurance that Innotrac will meet its expectations for future
taxable income in the carryforward period. However, management considered the
above factors in reaching the conclusion that it is more likely than not that
future taxable income will be sufficient to fully realize the net deferred tax
asset recorded at June 30, 2003. The amount of the net deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced. If it is
determined that the deferred tax asset is not realizable, the Company would
then be required to review recorded goodwill and other intangibles for
impairment in accordance with the provisions of SFAS No. 142.
20
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. The Company adopted SFAS No. 146 on
January 1, 2003; the adoption did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment to FASB Statement No. 123,"
which is effective for fiscal years beginning after December 15, 2002. SFAS No.
148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
also amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company accounts for stock-based compensation
under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees". The Company intends to continue to account for
stock-based employee compensation under APB No. 25. The additional disclosure
requirements of SFAS No. 148 are included in Note 1 of the Notes to Condensed
Consolidated Financial Statements within this 10-Q.
21
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Management believes the Company's exposure to market risks is immaterial.
Innotrac holds no market risk sensitive instruments for trading purposes. At
present, the Company does not employ any derivative financial instruments,
other financial instruments or derivative commodity instruments to hedge any
market risks and does not currently plan to employ them in the future. To the
extent that the Company has borrowings outstanding under its credit facility,
the Company will have market risk relating to the amount of borrowings due to
variable interest rates under the credit facility. The Company's exposure is
immaterial due to the short-term nature of these borrowings. Additionally, all
of the Company's lease obligations are fixed in nature as discussed in our
Annual Report on Form 10-K for the year ended December 31, 2002 and other
filings on file with the Securities and Exchange Commission.
ITEM 4 - CONTROLS AND PROCEDURES
Our management, including the chief executive and chief financial officers,
supervised and participated in an evaluation of our disclosure controls and
procedures (as defined in federal securities rules) as of the end of the fiscal
quarter covered in this report. Based on that evaluation, our CEO and CFO have
concluded that our disclosure controls and procedures were effective as of the
date of that evaluation.
22
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On Monday, May 19, 2003, the Company held its annual meeting of shareholders in
Duluth, Georgia. As of the record date, March 31, 2003, there were 11,674,595
shares of Common Stock issued, outstanding and entitled to vote at the annual
meeting. Represented at the meeting in person or by proxy were 10,889,906
shares representing 93.28% of the total shares of Common Stock entitled to vote
at the meeting.
The purpose of the meeting was to re-elect the following three directors to
three year terms expiring in 2006. The following table sets forth the number of
votes cast "for" reelection and the number of votes "withheld" for each
director. There were no abstentions or broker non-votes.
NUMBER OF VOTES
---------------------------------------
FOR WITHHELD
---------- --------
Martin J. Blank.............................. 10,416,285 473,621
David L. Gamsey.............................. 10,416,230 473,676
Joel E. Marks................................ 10,416,285 473,621
The directors whose terms continued after the meeting are Bruce V. Benator,
Scott D. Dorfman, David L. Ellin and Larry C. Hanger.
ITEM 5 - OTHER INFORMATION
The Company recently discovered that a shareholder had accumulated a total of
20.57% of the outstanding shares of Common Stock, which is above the 15% level
of ownership that would normally trigger the effectiveness of the Company's
Shareholder Rights Plan. After investigating the circumstances surrounding such
acquisition, the Board of Directors concluded that this shareholder had exceeded
the 15% level inadvertently and without an intention of triggering the
effectiveness of the Rights Plan. The Board of Directors amended the Rights Plan
on August 13, 2003 to exclude this shareholder from the definition of an
"Acquiring Person" under the Rights Plan unless and until the shareholder
becomes the beneficial owner of more than 25% of the shares of Common Stock
outstanding. At the same time, the Company has entered into an agreement with
this shareholder pursuant to which it has agreed (i) to vote its shares in
excess of 15% in proportion to the votes cast by all the other shareholders of
the Company, and (ii) not to participate in a proxy contest, seek election to
the Board or otherwise seek to increase control of the Company without the
approval of the Board.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Employment Agreement dated April 7, 2003, by and
between James McMurphy and Innotrac Corporation
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a).
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a).
23
32.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C.ss.1350.
32.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C.ss.1350.
(b) Reports on Form 8-K:
On April 29, 2003, the Company furnished to the Commission
pursuant to Items 9 and 12 of Form 8-K its press release
announcing the Company's financial results for the first
quarter of 2003.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOTRAC CORPORATION
-----------------------------------------------
(Registrant)
Date: August 14, 2003 /s/ Scott D. Dorfman
-----------------------------------------------
Scott D. Dorfman
President, Chief Executive Officer and Chairman
of the Board (Principal Executive Officer)
Date: August 14, 2003 /s/ David L. Gamsey
-----------------------------------------------
David L. Gamsey
Senior Vice President , Chief Financial Officer
and Secretary (Principal Financial and
Accounting Officer)
25